Economist, Telegraph Columnist, Broadcaster

Trading Under WTO Rules Would Be No Hardship

As one Brexit hurdle is cleared, the doom-mongers erect another. Ahead of last June’s referendum, the Treasury warned ad nauseam that voting to leave the European Union would spark “an immediate and profound economic shock”.

Since that vote, with the economy holding up regardless, we’ve seen endless legal battles and Parliamentary shenanigans stopping the Prime Minister from even getting the Brexit ball rolling.

Now, with the law allowing Article 50 to be triggered having finally passed, the doom-machine has been programmed anew. The Brexit-blockers’ new crie de coeur is the cataclysmic impact of leaving the EU with “no deal”, the dystopian wasteland the UK would become if we traded instead under “World Trade Organization rules”. Such nostrums are self-serving nonsense, the latest mutation of “Project Fear”, spread by those with little understanding of negotiation tactics and even less of economics.

The unelected House of Lords finally climbed down last week, dropping demands for a “binding vote” on any deal struck between the UK and the other 27 EU nations during upcoming two-year exit talks. That’s unalloyed good news. Had the Lords’ amendment held sway, powerful political interests across the EU would have been heavily incentivized to make sure our exit negotiations failed before they started.

That’s because the amendment gave Parliament a vote defaulting the UK back to the status quo of EU membership. The EU27, then, would have given us a stinker of a deal, provoking rejection by our Parliament, so keeping the UK in, along with our massive £8-£10bn annual contribution. The Lords amendment would have practically guaranteed two years of ghastly diplomatic conflict, with the UK staying in the EU.

The Prime Minister already promised a “binding vote” – in her Lancaster House “Priorities for Brexit” speech in January. Under that vote, if Parliament rejects our EU trade deal, we still leave, but instead trade under WTO rules. That makes a good deal far more likely, for both the UK and the EU.

Trading under WTO rules implies relatively low tariffs on UK exports to the EU and vice-versa. Now that such a trade regime is in the offing, industrial interests across Europe – the German carmakers, French food-processors and Italian furniture-makers who export heavily to Britain – have every reason to push EU politicians and eurocrats to do a mutually-beneficial trade deal with the UK.

With WTO rules as our default if any deal is rejected by Parliament, powerful players across the EU – mindful of the countless domestic jobs and billions of euros of UK-trade-related profit at stake – are now incentivized to urge their leaders to avoid the chest-beating and cut a grown-up trade deal that improves on WTO rules. They will do the UK’s lobbying for us.

Given that Parliament voted 6-to-1 for the British people to decide in a referendum if we stay in the EU, the Lords amendment would not only have been an affront to democracy. It would also have resulted in a bad-tempered and ultimately fruitless Article 50 negotiation.

What’s more, we’d also have spent the next two years wondering if we’re actually going to leave or not, with every negotiation twist and turn bringing renewed speculation over Parliamentary support. Business uncertainty would have been prolonged, seriously undermining investment and jobs. Far better to know we’re leaving, using the 2-year negotiation period to enact the “Great Repeal Bill” – bringing relevant EU law onto the UK statute book – legislating for our own immigration system and focusing on other non-trade aspects of our post-Brexit relationship. Under that scenario, there need be no “cliff-edge” and no “chaos” if we leave with “no trade deal”.

These Article 50 negotiations need not be as complex as many suggest. We should, as this column has often stated, say we’re happy outside the single market and the customs unions, trading under WTO rules. The real complication and loss of confidence, both among voters and on financial markets, will come if the political classes keep fighting over whether or not we’re leaving – which was what this egregious Lords amendment was all about.

Before our EU exit talks start, the government should unilaterally grant leave to remain for the 3m EU citizens living and working here. That makes sense for them and the businesses employing them. Many anyway have rights to remain under other non-EU treaties. Making this unilateral offer gives the UK the moral high ground as the negotiations start – and the EU will anyway be forced to reciprocate. No-one is going to eject the 1.2m EU-based UK citizens, generally highly-skilled professionals or wealthy retirees.

Taking this initiative would also send a positive signal of this country’s inherent good sense and tolerance, while reassuring those UK voters still upset we’re leaving, helping them to accept Brexit.

The government should also explain, urgently and repeatedly, that “trading under WTO rules” is by no means a bad outcome. In the short run, those UK sectors affected by WTO tariffs on their EU exports can be compensated using money raised from tariffs we collect from the EU – which will amount to more given our EU trade deficit. Such tariffs are anyway pretty low, outweighed by recent sterling depreciation and, once we’ve left the EU, can be negotiated lower still.

The UK already does over half its trade outside the EU, largely under WTO rules. That part of our trade is fast-growing and in surplus. The EU and US trade under WTO rules, as do the US and China and the EU and China. Most of the trade conducted across the globe is under WTO rules. That’s the reality – even if much of UK’s political and media class is determined not to grasp it.